Fascinating interview in the NYT magazine section today with Ray Fair; I find Fair’s primary thesis — that nearly all behavior can be attributed to economic self-interest — grossly oversimplifies the complexities of humanity. Indeed, one of the greatest flaws of classical economics has been the inability to explain away many of the behaviors of Humans which do not make coherent financial or economic sense. It’s as if they cannot deal with anything beyond quantifiable dollars and cents.
The fundamental flaw in the field is that Human Beings are Rational. We are not.
There is an entire universe of behavior which is economically contradictory. People do too many things which simply are against their own best financial interests — from smoking cigarettes to riding in cars without seatbelts to clipping coupons, there are far too many examples to list here.
I find Fair’s methodology to be less historically accurate than claimed. He predicted Bush Senior’s victory in 1992; Further, consider allt he instances when the eocnomy was doing very well — especially when measured by Job creation, and the incumbent party lost the presidency.
Here’s the kicker to all this: Despite Fair’s predictions for a Bush landslide, he is a Kerry supporter! (at least, that’s his claim)
Here’s the obligatory excerpt:
Are you a Republican?
I can’t credibly answer that question. Using game theory in economics, you are not going to believe me when I tell you my political affiliation because I know that you know that I could be behaving strategically. If I tell you I am a Kerry supporter, how do you know that I am not lying or behaving strategically to try to put more weight on the predictions and help the Republicans?
I don’t want to do game theory. I just want to know if you are a Kerry supporter.
Backing away from game theory, which is kind of cute, I am a Kerry supporter.
I believe you entirely, although I’m a little surprised, because your predictions implicitly lend support to Bush.
I am not attempting to be an advocate for one party or another. I am attempting to be a social scientist trying to explain voting behavior.
To me, the best thing about an incumbent defeat is that it will force Ray Fair to completely revisit his underlying assumptions about people in the broader macro-environment.
There’s a reason behavioral economics has been on the rise for the past decade; We are often irrational. Perhaps such a predictive failure will force Economics as a field to peer further into the inherent irrationality of Human Beings . . .
UPDATE: August 16, 2004 11:30am
A recent study (Ned Davis Research) on post WWII presidential campaigns determined that while “job growth does not guarantee a victory, sluggish job growth historically has hurt the incumbent party.” The party in power lost the presidency whenever the change in non-farm payrolls during the President’s term was below 5%. At present, its at -0.8%.
Consider the following:
–Gerald Ford had 5.7% non-farm payroll growth — but lost re-election due to his pardon of Richard Nixon.
–Jimmy Carter (12.1% payroll growth) lost due to runaway inflation and the Iran hostage crisis.
–Al Gore (9.0% payroll growth) lost in large part cause of Clinton’s scandals
–Lyndon Johnson (9.5% payroll growth) didn’t even run for a 2nd term; His prospects for re-election were so poor due to the Viet Nam war he simply bailed.
Yet all 4 of these Presidents enjoyed fairly robust job growth; How can that be? Very good job growth, and they still lost!
Might this mean that its sometimes more than mere economics?
Bush Landslide (in Theory)!
Interview by DEBORAH SOLOMON
NYT, August 15, 2004
Links for a Lazy Sunday
Leah has a good recap of bloggers at the Democratic National Convention. Any suggestions for New York? Respectful of Otters brings new light on the abortion debate. I am not a girl, and I missed the nuances of this issue…
Links for a Lazy Sunday
Leah has a good recap of bloggers and the SCLM at the Democratic National Convention. Any suggestions for New York? Seth Godin launches ChangeThis. Respectful of Otters brings new light on the abortion debate. I am not a girl, and…
“from smoking cigarettes to riding in cars without seatbelts to clipping coupons”
People make personal economic decisions based on their own subjective valuations of desired experiences and the efforts required to achieve them. So while I may take a big pay-cut by clipping coupons, relative to the money I earn by working at my job, I may judge it as worthwhile because it is a simple, even relaxing task, which may appeal to a personal desire to be frugal. I may judge this to be a worthwhile use of my time.
Likewise, many would say they’d rather live a few enjoyable years than a bunch of dull ones, hence the smoking. You can also consider the social appeal, which many smokers value highly.
My point being, you simply can’t judge these decisions as rational or irrational by reading a ledger sheet. Human decision making is infinitely more complex than that. That is why your “we aren’t rational” bit doesn’t stick.
I actually don’t believe that we’re rational by our very nature, but it is reality that imposes rationality on us by rewarding rational behavior and punishing irraitonal behavior. Which is to say, we converge to rationality, which any engineer will tell you, is good enough.
I don’t smoke or clip coupons.
So you would agree that its pretty fool hardy to declare that people vote SOLELY on their economic concerns?
That’s my point — very often people make decisions which, to an economist, makes no economic sense. To the person making those choices, there are other priorities than mere economics . . .
This is an untenable position. Let’s take an extreme
example: having children. Children are very
expensive. There is an excellent chance that you will
never recover the money you spend raising a child,
much less make a profit. But most people don’t raise
children for profit, they do it for emotional
satisfaction. One could say that they value the
emotional rewards that they get from raising children
more than they value the money that it costs.
One could say that, but what would it mean? We can
see that people raise children. Most of them are
aware that it costs money to do so. Most of them
can’t even make a rough estimate as to how much
children will cost them. Does that mean that to
decide to have children without considering
approximately what the financial costs will be is
irrational? I don’t think so.
There is a psychic cost in calculating the costs of
things. Making a best estimate about how much kids
will cost means that you’re the kind of person that
makes estimates about the costs of those kinds of
things. A lot of people don’t want to be that kind of
person. Is that irrational? One could say that they
value the emotional rewards of being the kind of
person they want to be more than they value the money
they might loose being more rational about money.
One could say that but what would that mean? …
People behave economically rationally if you define
their values by their behavior. But what other method
can you use to decide what someone else values?
“people make decisions which, to an economist, makes no economic sense”
I’m just troubled by you equating rationality with “whatever makes my pocket-book fatter”. Because, as Mr. Barrett points out, if “economic sense” doesn’t yield real sense, then it’s not much use. We should reconsider what we consider economic sense.
To illustrate my point: Getting laid regularly equates, on average to about $50,000 anually, in terms of resulting happiness. So I could forgo a “great” economic opportunity and still be better off if my choice got me a meaningful relationship instead. This doesn’t make me unreasonable, it makes me happy.
It’s a little strange, but I’m convinced economics, on a personal level, like with Mr. Fair’s game theory, should be about more than money, if it hopes to do the things Mr. Fair is attempting, like predict how people will act in the future. It should be about seeking pleasure and avoiding pain, the two fundamental biological motivators.
Businesses don’t care about happiness, they care about the bottom line, as they should. However, employees, consumers, and people in general, do care about happiness, which does have economic value to them, and factors into their decisions. This does not suggest incoherance or irrationality. It does suggest greater complexity.
As for me, I predict Mr. Fair will be continually frustrated trying to balance his infinitely complex equation. Nash equalibria are meaningful almost exclusively in contrived games or extremely simple systems. They’re the only easy answers that I know of, and they have serious flaws. Lucky for Mr. Fair, he’ll only be proven wrong about once every 8 years, so Yale will hardly notice.
As for Mr. Barrett, I think the answer he’s looking for is evolutionary game theory.
I believe is that the problem is that the economist tries to reduce the complexity of –> short term/long term interest ; financial/spiritual ; pleasure/pain ; conform/rebel ; real interests/percieved interest ; productive/self destructive behaviors ; etc –> into a calculation that all of those and more feed our decisions in calculations that can be reduced to util value.
But if EVERYTHING can be reduced to util values, then util value has no descriptive value.
Economics and the assumptions of behavior based on economic self interest are very useful for attempting to understanding many things.
I don’t think, however, that economics will ever provide the most useful set of analytic tools for understanding why a fourteen year old girl living in the projects in Hartford CT. raised by a single mother, raped by an uncle, barraged by pop culture and a failing school system “decides” to have a baby.
Certainly you could set up econometric models to try to understand that. But I think that other lines of inquiry will cut to the center more effectively.
I should have said “util value has no descriptive POWER’
Also, in response to your brewing objection.
What I’m saying is that the assumptions of economic regarding human behavior (as being primarily about improving material well being) are so far removed from the motivations of the hypothetical 14 year old girl as to render them as extremely clumsy tool of inquiry.
If all you have is a large, expensive set of high quality allen wrenches, then everything starts to look a hex nut.